NECESSITY, FUNCTION, AND
CONFORMITY: KRS 141.120(8) requires that all business income of multistate
corporations be apportioned to Kentucky by multiplying the income by a
fraction, the numerator of which is the property factor plus the payroll factor
plus a double weighted sales factor and the denominator of which is four (4).
KRS 141.120(10)(b) requires the cabinet to promulgate administrative
regulations providing how to determine the property factor used in the
multi-state business income apportionment formula. This administrative
regulation establishes the requirements for determining the property factor of
a multistate corporation.

Section 1. Definitions. (1)
"Annual rent" means the actual sum of money or other consideration
payable, directly or indirectly, by the corporation for its benefit for the use
of the property;

(a) Including:

1. Any amount payable for the
use of real or tangible personal property whether designated as a fixed sum of
money or as a percentage of sales, profits or otherwise; and

2. Any amount payable as
additional rent or in lieu of rents, such as interest, taxes, insurance,
repairs or any other items which are required to be paid by the terms of the
lease or other arrangement; and

(b) Not including:

1. Amounts paid as service
charges, such as utilities or janitorial services; and

2. Incidental day-to-day
expenses such as hotel or motel accommodations, or daily rental of automobiles.

(2) "Net annual rental
rate" means the total annual rental paid, less total annual rental
received from subrentals, which shall:

(a) Be subtracted if they constitute
nonbusiness income; and

(b) Not be subtracted if they
constitute business income because the property which produces the subrentals
is used in the regular course of a trade or business of the taxpayer when it is
producing business income.

(3) "Original cost"
means the basis of the property for federal income tax purposes, prior to any
federal adjustments, at the time of acquisition by the corporation and adjusted
by subsequent capital additions or improvements thereto and partial disposition
thereof, by reason of sale, exchange, or abandonment.

Section 2. General. The
property factor shall include all real and tangible personal property owned or
rented and used during the taxable year, except coin, currency, and pollution
control property located in Kentucky for which a tax exemption certificate is
issued by the Department of Revenue.

Section 3. Property Used. (1)
Property shall be included in the property factor if it is actually used or is
available for or capable of being used during the taxable year. Property held
as reserves or standby facilities or property held as a reserve source of
materials shall be included in the factor. For example, a plant temporarily
idle or raw material reserves not currently being processed shall be included in the factor.

(2) Inventory in process
shall be included in the factor. Property or equipment under construction
during the taxable year shall be excluded from the factor until it is actually
used or is available for or capable of being used during the taxable year.

(3) Property used shall
remain in the property factor until its permanent withdrawal is established by
an identifiable event such as its sale.

Section 4. Consistency in
Reporting. (1) Year-to-year consistency. In filing returns with this state, if
the taxpayer departs from or modifies the manner of valuing property or of
excluding property from or including property in the property factor used in
returns for prior years, the taxpayer shall disclose in the return for the
current year the nature and extent of the modification.

(2) State-to-state
consistency. If the returns or reports filed by the taxpayer with all states to
which the taxpayer reports are not uniform in the valuation of property and in
the exclusion of property from or the inclusion of property in the property factor,
the taxpayer shall disclose in its return to this state the nature and extent
of the variance.

Section 5. Property Factor:
Numerator. (1) Property in transit between a buyer and seller shall be included
in the numerator according to the state of destination. Property in transit
between locations of the same corporation shall be considered at the
destination location for purposes of the property factor.

(2) The value of mobile or
movable property such as construction equipment, trucks or leased electronic
equipment which is located within and without Kentucky during the taxable year
shall be determined, for purposes of the numerator of the factor, on the basis
of total time within the state during the taxable year. An automobile assigned
to a traveling employee shall be included in the numerator of the factor of the
state to which the employee’s compensation is assigned under the payroll factor
or in the numerator of the state in which the automobile is licensed.

Section 6. Valuation of Owned
Property. (1) Property owned by the corporation shall be valued at original
cost.

(2) Capitalized intangible
drilling and development costs shall be included in the property factor whether
or not they have been expensed for either federal or state purposes.

(3) If the original cost of
property is not ascertainable, is nominal, or is zero, the property shall be
included in the factor at its fair market value at the date of acquisition by
the corporation.

(4) Inventory shall be
included in the factor by the valuation method used for federal income tax
purposes.

(5) Property acquired by gift
or inheritance shall be included in the factor at its basis for depreciation
for federal income tax purposes.

(a) If the property is rented
for a twelve (12) month period, the annual rent;

(b) If the property is rented
for less than a twelve (12) month period, the net rent paid for the actual
period of rental; or

(c) If the property is rented
for a period of twelve (12) or more months, and the current tax period covers a
period of less than twelve (12) months due, for example, to a reorganization or
change of accounting period, the net rent paid for the short tax period shall
be annualized.

(2)(a) Property rented by a
corporation shall be valued at eight (8) times the net annual rental rate.

(b) If this calculation
results in a negative value or a clearly inaccurate valuation, any other method
which will properly reflect the value may be required by the department or may
be requested by the corporation, except the net annual rental rate shall not be
less than the total annual rental rate multiplied by a fraction, the numerator
of which is the fair market value of rent applicable to rental property used by
the corporation divided by the fair market value of rent applicable to all of
the corporation’s rental property.

(c) If a payment includes
rent and other charges unsegregated, the amount of rent shall be determined by
consideration of the relative values of the rent and the other items.

(3) If property is used at no
charge or rented for a nominal rate, the property shall be included in the
property factor on the basis of the fair market value of rent for comparable
property in the area.

(4) Leasehold improvements
shall, for the purposes of the property factor, be treated as property owned by
the corporation regardless of whether the corporation is entitled to remove the
improvements or the improvements revert to the lessor upon expiration of the
lease. The original cost of a leasehold improvement shall be included in the
factor.